China Is Pushing New Silk Road in Indonesia

Indonesia and China are examining cooperation in developing the infrastructure of the archipelago. Representatives of governments and state-owned companies from both sides met at the end of March in Bali for the awarding of 28 projects worth US$ 91.1 billion. For seven more projects, according to Indonesian government circles, only feasibility studies are being prepared. Originally, 50 projects had been in the range. Chinese infrastructure projects abroad, especially if they serve trade, are considered part of the so-called new Silk Road.

The projects in Indonesia are all infrastructure projects, including industrial parks, metallurgical and power plants, and tourism facilities. So far, there are no official statements about agreements. According to the Indonesian Ministry of Economic Affairs, agreements on two or three projects are initially expected. Stakeholders said that only one project – the construction of a port facility on Kalimantan – is in a more concrete negotiation phase.

The Indonesian investment authority BKPM has designated, among others, North Sumatra, North Kalimantan, North Sulawesi and Bali – the so-called Regional Comprehensive Economic Corridor – as project locations. North Sumatra is on the trade route of the Street of Malacca, while North Kalimantan, with its great potential for hydropower, is well-suited for the construction of energy-hungry metallurgical plants.

Indonesia urgently needs private and foreign capital to finance its nationwide infrastructure offensive. Only about $30 billion are budgeted in the 2019 budget. A significantly larger sum must be obtained from other sources. Funds from China or international development banks are just right. To what extent the latter are involved in the current projects is not yet clear.

Siemens seeks access to power plant projects
Indonesia wants to make project assignment conditional. These include the highest technological standards and the use of Indonesian workers (constant rumors about Chinese work teams in large-scale projects are provoking resentment in the population). However, the most important requirement is the National Capacity Building, which is often invoked by the government – the establishment and expansion of the technological potential of the Indonesian industry, which is lagging behind by regional standards. According to this, the project participants should transfer know-how to Indonesian companies and - wherever possible – use components produced in the country.

This is where the power plant division of Siemens, which was invited to the first Joint Steering Committee in Bali, came into play. In order to gain access to projects as a supplier, the company has established numerous cooperation agreements in Indonesia. For example, a plant in Cilegon, which has been producing large components for power plants for decades, was sold to the state-owned company Barata in 2018, which continues to manufacture components locally on behalf of Siemens. Siemens is also working with other state-owned companies, such as Pindad or PAL, to manufacture generators or to assemble imported Siemens components locally.

Especially in power plant construction, Chinese companies have fallen into disrepute in Indonesia. They have delivered poor quality products and have been systematically excluded for some time in tenders for failing to meet OECD requirements. If they want access to the Indonesian market, they need to involve other technology providers. Gas turbines cannot yet be produced by Chinese companies.

China wants to strengthen trade routes to Europe
It is still unclear for which of the offered infrastructure projects Chinese general contractors will ultimately be awarded the contract. According to observers, the Chinese interest is mainly directed at projects on the trade routes to Europe. They were there for as long as possible in order to have a piece of that cake. However, the Indonesian side seems to confidently represent its own interests and to insist on the development of other parts of the country.

The growing economic impact from China, which now accounts for a quarter of all imports, is viewed with skepticism in Indonesia. Resistance is also growing in neighboring Malaysia, where the government has stopped the construction of a high-speed railway line by a Chinese company and forced the renegotiation of the price.

In Indonesia, Chinese companies are involved in numerous infrastructure projects. The flagship project is the first high-speed rail line from Jakarta to Bandung, 150 kilometers away, which Japanese companies had also applied to build. It will cost $ 5.6 billion and be completed by 2022 at the latest.

GTAI is the foreign trade and inward investment agency of the Federal Republic of Germany. The organization advises foreign companies looking to expand their business activities in the German market. It provides information on foreign trade to German companies that seek to enter into foreign markets.